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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

We are looking at big deficits for the next seven years, but what happens when the flows from Social Security begin to reverse seven years out? What is your long-term plan for the solvency of the United States?

We talk about a strong dollar policy, but we flood the rest of the world with dollar claims. How can we have a strong dollar?

None of your policies has moved to reduce the culture of leverage. How will you reduce total leverage in the US?

Why did you sacrifice public trust that the Treasury would be equitable, in order to bail out private entities at the holding company [level]? People now believe that in a crisis, the government takes from the prudent to reward the foolish. Why should the prudent back such a government?

If we had to do bailouts, why did we bail out financial holding companies, which are not systemically important, instead of their systemically critical subsidiaries?

We are discussing giving tools to regulators for the tighter management of the solvency of financials. There were tools for managing solvency in the past that went unused. Why should we believe the new “stronger” tools will be used when the older tools weren’t used to their full capacity? (The banks push back hard.)

I’ve answered 1 and 2. The rest are unanswered. Here are the brief answers.

3) No, there is no strong dollar policy. Wait for the day when we are net exporters (and our relative wages will be lower then.)

4) They are doing nothing to reduce total leverage in the US. My own guess is that it is increasing.

5) And there is the question, aside from fairness, were the bailouts Constitutional? A narrow reading of the Constitution says no, but our government does many, many things that violate a narrow reading of the Constitution. The fairness question was not raised either, the bloggers there were attacking effectiveness, not fairness.

6) This is my guess — we bailed out holding companies because it was the simplest way to do it. More thought would have led to a cheaper solution, but thought is rare during a panic.

7) I have no answer to point 7. There is no good reason to hand over stronger tools to a culture that has not used weaker tools.

Aside from all that, we could have spent more time on international issues. There was the joke at the beginning of the session that one fellow tasked with raising money was “fluent in Mandarin.” From the chuckles, I gauged it to be a joke.

But that might prove to be the most significant point economically. The Treasury is putting pressure on the Dollar through high debt issuance, and the Fed through the creation of short-term credit to heal various debt markets. The benefits are going to debtors, not creditors. What value should the creditors assign to the Dollar? The simple answer should be less than previously. Yet, nations follow many noneconomic goals, many of which benefit the US as the reserve currency in the short-run.

The ultimate answers are complex, because they rely on how other nations will act.

Final Note

I have found interesting the commenters that automatically assume that being willing to go to the Treasury and eat one cookie equals compromise. There are a lot of scared and frustrated people in the US, and they see their prosperity ebbing, and are looking for someone to blame.

Let me try this — as the world has gone capitalist, the edge of the US has been eroded. Now we face a world where doing certain jobe should pay the same, regardless of where they are located. Wages in the US will converge with those from the rest of the world, adjusted for capital investments.

Throughout human history, “middle classes” have been abnormal. The current adjustment in the US may be showing the once large middle class that it is not a normal thing, and is hard to maintain.

There is no conspiracy. The US Government is up against economic forces larger than it can combat. The rest of the world is out-competing the US, and the US has a shrinking portion of the pie as a result.

About David Merkel

David J. Merkel, CFA, FSA, is a leading commentator at the excellent investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited David to write for the site, and write he does — on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, and more. His specialty is looking at the interlinkages in the markets in order to understand individual markets better.
David is also presently a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. He also manages the internal profit sharing and charitable endowment monies of the firm.
Prior to joining Hovde in 2003, Merkel managed corporate bonds for Dwight Asset Management. In 1998, he joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.
His background as a life actuary has given David a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that David will deal with in this blog.
Merkel holds bachelor’s and master’s degrees from Johns Hopkins University. In his spare time, he takes care of his eight children with his wonderful wife Ruth. View all posts by David Merkel →